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The puzzle of EOH's share collapse

Markets were kept in the dark on Friday over what had triggered the collapse in software and technology company EOH’s share price a day earlier.

Investors were left to speculate that corruption allegations levelled at one of the businesses the group owned — but had now sold — were behind the sudden fall. EOH declined to comment on this assumption.

On Wednesday, the Daily Maverick reported that the Independent Police Investigative Directorate (Ipid) had raided the home of Keith Keating, who is a director of three businesses the EOH group bought in November 2015 for R868m and is now in the process of selling.

Keating and at least one of these businesses, Forensic Data Analysts (FDA), have been implicated in procurement misdeeds involving the South African Information and Technology Agency and the South African Police Service.

After Thursday’s market close, EOH said it had agreed with the former shareholders of FDA, Grid Control Technologies (GCT) and Investigative Software Solutions (ISS) to "unwind" the purchase of these bus-inesses, effective October 31 2017. It made no mention of Keating, the Ipid raid or the allegations levelled at FDA.

EOH describes itself as the largest technology services company in Africa. It employs 12,500 people and is present in 50 countries outside SA.

In April, investigative journalism unit amaBhungane implicated the company in wrongdoing involving information technology contracts at the social development department. The article was later amended to reflect that no evidence was found to prove that EOH had acted unlawfully in winning such contracts — an allegation the group strongly denied.

After a 35% slide on Thursday, EOH’s share price recovered 5.6% on Friday to close at R47.52. The stock is down about 72% over the past year. This raises questions over how EOH will fund future acquisitive growth, as it has relied heavily on issuing shares as payment for the companies it buys.

Just over half of the purchase price of FDA, GCT and ISS was paid for through the issue of shares, which at the time were trading at about R150.

EOH had maintained a strategy of acquisitions since listing in 1998, buying about 100 businesses since then, but possibly more, Keith McLachlan, a fund manager at AlphaWealth, said on Friday.

"The market is saying it doesn’t trust that EOH has communicated the full picture," he said. "I stopped going to their results presentations a few years ago because they gave no detail [and] answered direct questions with vague answers." McLachlan estimated that a fifth to a quarter of EOH’s business came from the public sector.

EOH director Jehan Mackay, and companies of which his family trust is a beneficiary, sold shares on November 24, December 1 and December 4 in 2017, when the share was trading at about R80. The value of these sales exceeded R18m.

Meanwhile, founder and former CEO Asher Bohbot said on Friday he had not sold an EOH share in "many years".

He holds between 3.5% and 4% of the firm and is no longer a director, so his share dealings do not need to be publicised.